Mr. Kaplan made nearly two dozen stock trades of $1 million or more last year... Those included transactions in companies whose stocks were affected by the pandemic — such as Johnson & Johnson and several oil and gas companies — and in firms whose bonds the Fed eventually bought in its broad-based program... Mr. Kaplan was buying and selling oil company shares just as the Fed was debating what role it should play in regulating climate-related finance. And everything the Fed did in 2020 — like slashing rates to near zero and buying trillions in government-backed debt — affected the stock market, sending equity prices higher... Mr. Kaplan’s financial activity included trading in a corporate bond exchange-traded fund, which is effectively a bundle of company debt that trades like a stock. The Fed bought shares in that type of fund last year... “People will ask, fairly or otherwise, about the extent to which his views about the balance sheet or interest rates are influenced by his personal investments in the stock market,” Ms. Binder said of Mr. Kaplan’s trades.
In fact, Kaplan also purchased shares of Apple while the Fed was buying the company's bonds. It's difficult to imagine that Fed officials with exposures to the stock market can take a dispassionate view on decisions that while necessary for the economy as a whole (like exiting quantitative easing) may adversely impact the financial markets (and thereby their personal financial interests). We are all human beings, captives of our own personal preferences. And when millions are at stake, how can we expect the typical human being to deviate from such high stakes personal interests?
In a veiled admission of culpability, both officials have announced their resignation. It's also a reflection of the institutional maturity of the system that once such practices come out in the open, it becomes untenable for these officials to continue. But the same system also promotes a culture of self-censorship which generally prevents such cozy relationships from being exposed.
Central banks have grown in enormous importance over the last 25 years, coming to occupy an exalted position of power over national economies but with little democratic accountability. Their actions have enormous distributional consequences, even involving future generations. These are essentially political choices made by unelected technocrats using objective functions which are often biased towards protecting the status quo and the welfare of powerful financial market interests.
I have blogged here about the problems with such exercise of power and also pointed to several instances of questionable and even corrupt practices by central bankers. The Times article draws attention to one such matter of concern,
Janet L. Yellen, the former central bank chair, faced criticism when financial documents filed as part of her nomination for Treasury secretary showed that she had received more than $7 million in bank and corporate speaking fees in 2019 and 2020, after leaving her top central bank role.
It's difficult to believe that Ms Yellen would have received such fantastic sums if not for her previous Fed role. Even more disturbingly, after having received such generosity, it's questionable as to how tough she can humanly be with the same interests she's now entrusted to control.
This is a good illustration of the complex legal and ideological props to entrench the status quo,
The Federal Reserve Act limits governors’ abilities to go straight to bank payrolls if they leave before their terms lapse, but speaking fees from the finance industry are permitted. Defenders of the status quo sometimes argue that the Fed would struggle to attract top talent if it curbed how much current and former officials can participate in markets and the financial industry. They could face big tax bills if they had to turn financial holdings into cash upon starting central bank jobs. Because Fed officials tend to have financial backgrounds, banning financial sector work after they leave government could limit their options.
Another WSJ investigation revealed that 131 federal judges (out of a total of 600 odd full time federal trial judges) broke law between 2010-18 by presiding over 685 cases involving companies in which they or their families also happened to be shareholders.
About two-thirds of federal district judges disclosed holdings of individual stocks, and nearly one of every five who did heard at least one case involving those stocks... When judges participated in such cases, about two-thirds of their rulings on motions that were contested came down in favor of their or their family’s financial interests... The Journal found 61 judges or their families not only holding stocks in companies that were plaintiffs or defendants in the judges’ courts but also trading the stocks during cases...In New York, Judge Edgardo Ramos handled a suit between an Exxon Mobil Corp. unit and TIG Insurance Co. over a pollution claim while owning between $15,001 and $50,000 of Exxon stock, according to his financial disclosure form. He accepted an arbitration panel’s opinion that TIG should pay Exxon $25 million and added $8 million of interest to the tab. In Colorado, Judge Lewis Babcock oversaw a case involving a Comcast Corp. subsidiary, ruling in its favor, while he or his family held between $15,001 and $50,000 of Comcast stock. At an Ohio-based appeals court, Judge Julia Smith Gibbons wrote an opinion that favored Ford Motor Co. in a trademark dispute while her husband held stock in the auto maker. After she and the others on the three-judge appellate panel heard arguments but before they ruled, her husband’s financial adviser bought two chunks of Ford stock, each valued at up to $15,000, for his retirement account, according to her disclosure form... Timothy Batten Sr., chief judge of the U.S. District Court for the Northern District of Georgia and a member of the Committee on Codes of Conduct for the Judicial Conference of the U.S... himself owned shares of JPMorgan Chase & Co. while he heard 11 lawsuits involving the bank, most of which ended in the bank’s favor...
The ethics code for federal judges “requires recusal when a judge has a financial conflict, regardless of the substance of the judge’s actual involvement in the case,” the Judicial Conference’s Committee on Codes of Conduct wrote in a letter to a judge this month.
The third story concerns the institutionalised revolving door between private and public sectors. Consider this example,
For six years, Audrey Ellis and Adam Feuerstein worked together at PwC, the giant accounting firm, helping the world’s biggest companies avoid taxes. In mid-2018, one of Mr. Feuerstein’s clients, an influential association of real estate companies, was trying to persuade government officials that its members should qualify for a new federal tax break. Mr. Feuerstein knew just the person to turn to for help. Ms. Ellis had recently joined the Treasury Department, and she was drafting the rules for this very deduction. That summer, Ms. Ellis met with Mr. Feuerstein and his client’s lobbyists. The next week, the Treasury granted their wish — a decision potentially worth billions of dollars to PwC’s clients. About a year later, Ms. Ellis returned to PwC, where she was immediately promoted to partner. She and Mr. Feuerstein now work together advising large companies on how to exploit wrinkles in the tax regulations that Ms. Ellis helped write.
The NYT story concerns the practice in accounting industry,
The largest U.S. accounting firms have perfected a remarkably effective behind-the-scenes system to promote their interests in Washington. Their tax lawyers take senior jobs at the Treasury Department, where they write policies that are frequently favorable to their former corporate clients, often with the expectation that they will soon return to their old employers. The firms welcome them back with loftier titles and higher pay... From their government posts, many of the industry veterans approved loopholes long exploited by their former firms, gave tax breaks to former clients and rolled back efforts to rein in tax shelters — with enormous impact... some former industry veterans said they viewed the rapid back-and-forth arrangements as a big part of the reason that tax policy had become so skewed in favor of the wealthy, at the expense of just about everyone else...
In the last four presidential administrations, there were at least 35 instances of round trips from big accounting firms through Treasury’s tax policy office, along with the Internal Revenue Service and the Congressional Joint Committee on Taxation, and back to the same firm, according to public records and interviews with government and industry officials. In at least 16 of those cases, the officials were promoted to partner when they rejoined their old accounting firms. The firms often double the pay of employees upon their return from their government sojourns. Some partners end up earning more than $1 million a year... Going from an accounting firm into the Treasury means taking a big pay cut. But lawyers know they are likely to be rewarded with significantly higher pay when they rejoin their old firm... five of the last six people to run the Treasury tax office had returned to their previous accounting or law firms after stepping down from their government jobs.
The article has several instances of how brazen the revolving door and cohabitation has become - officials working one day in private sector and the next week in public sector dealing with the same issues they were dealing in their parent firm and then back; officials formally drawing benefits from their private employers while working in important public positions etc.
For Indians smitten with the bug of lateral entry, this is a cautionary note.
No comments:
Post a Comment